Section 10:
The Market Situation
The Market Situation is an advanced, multi-level view of the trend in the broader market. Identifying the trend of the broader market could be as simple as using one of the trend identification methods on the S&P 500 or NASDAQ-100, or another broad market index. The Market Situation, however, takes a multi-faceted view of the market, not just a high-level overview of the trend. Identifying the current situation of the market, and aligning your trading with it, is a good way to increase the probabilities of success when trading price patterns.
There is an ideal Market Situation during which to apply the four different categories of price patterns: bullish continuation, bearish continuation, bullish reversal, and bearish reversal. For example, sometimes it’s better to focus on bullish continuation patterns than bearish continuation patterns. Other times it might be more favorable to focus on and trade bullish reversal patterns.
The “ideal” Market Situation for each category of patterns is pretty rare. Occasionally a perfect set-up will come along when the Market Situation is just right for trading bullish continuation patterns. Other times, the Market Situation is just right for trading bullish reversals. Still other times, the Market Situation might suggest trading bearish continuation or bearish reversal patterns. Most of the time the market situation is somewhere in between, in a gray area as the various types of patterns are forming.
The idea is to use the Market Situation to increase the probabilities of success. This is achieved by focusing on the types of price patterns that best fit the current Market Situation. The Market Situation can be divided into five categories to make the process simple, consistent, and objective: Bull, Bull Alert, Neutral, Bear, and Bear Alert.